Top of Wallet: Card Issuers Refine the Art of Customer Data Crunching

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Pulling a credit card out of your wallet is practically an unconscious act for many - we give it as much thought as we do blinking.

But the habit is one banks are increasingly focused on, as they find more and more sophisticated ways to entice consumers to swipe their cards over those of their rival banks. Part of that effort involves examining consumer data more closely, and putting that data to use when it comes to launching promotions and offers designed to ensure consumers will continue using a card, or perhaps consider picking up a different one next time they are at the register.

Dana Traci, the vice president of rewards at Discover Financial Services (DFS), says the issuer is using analytics and segmentation to do deeper dives on customer behavior and tailor its marketing accordingly.

"If spending is sliding, we might offer them a targeted incentive to continue to use Discover as their primary card," she adds. "An example of that might be a double cash-back promotion we might be running, targeted around a certain category that might offer customers 2% cash back," instead of the typical 1%.

The credit card company is also able to use what they learn from such targeted offers and apply them across a wider base if they are successful.

"Analyzing results helps inform future strategies. If it drives the consumer base, it could become part of our mass strategies over time," says Traci.

It can be difficult to pinpoint whether an uptick in consumer spending on a card is spurred directly by a targeted bank promotion, but analysts say that banks are getting better at drawing meaning from customer data that can be used to send better offers to specific cardholders. Bankers from Discover, JPMorgan Chase (JPM) and Bank of America (BAC) also say they've been able to improve customer engagement and better design their card programs by talking to customers and drawing lessons from data on customer spending and behavior.

Matthew Friend, a senior executive in the payment services division at consultancy Accenture, says the number of issuers who are applying analytics to have more targeted offers has picked up over the last year.

Improving tracking methods — and follow-up communication — is critical, bankers and analysts say, because almost three-quarters of consumers have at least one credit card, with the average cardholder having between three and four credit cards, according to a 2009 survey conducted by the Federal Reserve Bank of Boston. That means the typical cardholder already has a lot of choices each time he reaches into his wallet.

Sean O'Reilly, a general manager for JPMorgan Chase's Sapphire card, says that the timing of communication — particularly in the first three or four months after an account is opened — is critical for engaging a cardholder.

"We put a lot of effort into explaining to them that they made a good choice," says O'Reilly. "That's been a big area of focus at Chase in last couple of years, and we see results in level of spend and level of engagement."

"I think what we see is that customers are extremely savvy today, and there's no shortage of promotional deals in this category," he adds. "We use everything from qualitative data to understanding trends in spending. … It's based upon what our customers' needs are and where we see them taking advantage of the card."

Titi Cole, Bank of America's retail products executive, says that in addition to strategies designed to focus on consumer demographics and spending — like including cardholders in a back-to-school promotion if data suggest they have younger kids — the bank has also benefitted from rewarding customers for their other relationships with the bank.

With the bank's "cash rewards" credit card, customers can receive an additional 10% cash back if card rewards are deposited into a checking or savings account with the bank — a bonus that Cole says has "resonated with customers."

The bank is "actually giving me a tangible reward for having that relationship," she says.

Analysts say that integrating card promotions as part of the larger banking relationship could also be especially valuable for regional banks. Several banks, including KeyCorp (KEY), Regions Financial (RF) and Sovereign Bank all bought back their credit card businesses in the last 15 months to increase revenue, and will need to start winning customers and spending over from some of their larger rivals.

"I would suspect that if you look at the regional banks, many of them will try and get back into the card game," says Hank Israel, a partner at the consultancy Novantas.

"There's a huge opportunity for regional banks to recapture that business," he adds.

But he cautions that winning over a good chunk of cardholder spending won't be a slam dunk, and says that use of analytical data may help.

"Will they not only be able to get a share of cards, but actually get utilization up? It's not an easy challenge," he says. "Their game is going to have to be, 'How do I bundle this stuff, credit cards and banking, so that it's appealing and simple to that customer?'"

"I think the national players have to focus on right time, right offer," he adds. "Both have to focus on analytics, but it's how to focus that effort."

And banks of all sizes still have a steep learning curve for collecting and utilizing data accurately and effectively, analysts say.

"A lot of them … dream up a hypothesis and throw it against the wall to see what sticks," says Israel. "At its core it's really psychological testing of different populations."

And the difficulty comes not only from guessing consumers' current preferences, but from being able to anticipate when major life changes might radically change spending habits.

"What are those changes in your life that will potentially drive your behavior? Did you change your last name? Did you change your address? When is it going to be the time that's most ripe to make the offer to you?" says Accenture's Friend.

"It's still a fine blend of art and science. It's been art for a long time, and I think as more data points come up it's becoming more and more a science in insights into you and your behavior," he adds.

But at least for the time being, retaining a bit of art has its advantages.

For one, if issuers take an iterative approach over the course of several mailings, they have the ability to feel out at what point a customer is enticed.

"Credit companies are also testing the water a lot. 'You didn't go for 0% for 12 months, so let's try 15 months,'" says Odysseas Papadimitriou, founder and chief executive of Evolution Finance Inc.'s "They're progressively trying and seeing where I bite. It's kind of like a silent negotiation."

And while other companies, like upscale hotel chain Ritz Carlton, are lauded for their personal touches, like keeping tabs on customer preference for special pillows or dietary needs, others have been subject to a backlash when they use consumer data a little too well.

For example, a detailed article in the New York Times this past winter examined data tracking practices at retailer Target, and the ways it's actually had to temper its promotional strategy after becoming too good at predicting major life events, like pregnancy.

The article details the story of one father outside Minneapolis who angrily approached his local Target store about maternity-related coupons addressed to his high school-aged daughter, only to find out later that she was actually pregnant.

"The data doesn't lie per se, but it's not perfect. Even when it's close, there's that feeling of Big Brother. How do banks temper that in creating an experience that's valuable for you?" says Israel.

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Consumer banking